First Step in CIRO Rules Consolidation Project

CIRO has released its first set of proposals for a five-phase project to establish a single set of rules applicable to both investment dealers and mutual fund dealers. The proposals address interpretation provisions, definitions of common application, rule exemption provisions and general standards of conduct applicable to all activities of dealers and their employees and approved persons. Given that subsequent phases of the Project may necessitate amending some proposed definitions, the definitions are referred to as “interim”.

While many of the proposals reflect efforts to harmonize non-substantive differences between MFDA and IIROC Rules, a few proposals may have a significant effect on your operations. These are discussed below.

Principles-Based Rules for Mutual Fund Dealers

CIRO is seeking to adopt less prescriptive, more principles-based rules that are scalable and proportionate to the different types and sizes of dealers and their respective business models. We have seen that principles-based rules have given regulatory staff greater discretion in determining what is permissible and leeway in providing “guidance” as to appropriate manners to meet principles. We remain hopeful that CIRO Staff will exercise a standard of reasonableness in assessing compliance with principles in the context of different business models.

Greater Delegation Powers for Mutual Fund Dealers

IIROC’sRules allow the delegation of tasks and activities unless specifically prohibited. The MFDA prohibits delegation of duties to be performed, supervised or managed by a person with a specific job title, approved person category and/or considered to be securities-related business unless the delegation is specifically permitted. While seeking comments, CIRO has proposed to follow IIROC’s approach, which will give mutual fund dealers more leeway in terms of delegation.

Elimination of Temporary Discretionary Accounts for Investment Dealers

In the past, when communications with clients could be difficult, if not impossible, and/or expensive (i.e., travelling overseas) it was seen that it could be in clients interest to give discretion to IIROC reps to make trades in “temporary discretionary accounts” without client approval.  Given today’s ease and low cost of communications, CIRO is proposing to terminate these types of accounts.  Applicable reps and clients will need to be informed, especially those who have long-standing relationships where discretionary accounts have been relied upon have been in use.

The following account types would continue to be available only to investment dealers: 

a) direct electronic access accounts; 

b) managed accounts; and 

c) order execution only accounts. 

Industry participants have been asked to comment as to whether mutual fund dealers should be able to offer managed accounts and order execution accounts as part of a future phase of the Project.  The implications of permitting the same are considerable and we expect many comments to be received from both MFDA dealers and IIROC dealers, and self-directed IIROC dealers in particular.

Harmonization of Risk Adjusted Capital

Currently, investment dealers and mutual fund dealers submit different financial solvency reports which utilize different calculations to determine risk-adjusted capital. Although the Phase 1 proposals contain definitional changes to maintain the status quo at least on an interim basis, CIRO has asked industry members to provide feedback regarding whether two different financial filing forms should be maintained going forward or whether the industry should move to one standard form for all CIRO members for calculating and reporting risk adjusted capital..

Harmonization of Rules that Apply to Approved Persons

Material differences exist in the approved persons regimes that apply to investment dealers and mutual fund dealers. The extent to which these regimes can be harmonized will be addressed as part of a future phase of the Rules Consolidation Project. The proposals would make certain definitional changes to maintain the status quo with regard to the approved person regimes applicable to IIROC and MFDA dealers. CIRO is seeking industry input as to factors to be considered in developing a single regime.

Application of Institutional Client Concept to Mutual Fund Dealers

The concept of an “institutional client,” is one that applies only to investment dealers and is coupled with specific sales conduct requirements. CIRO has asked whether a distinction between retail clients and institutional clients should apply to mutual fund dealers or whether all clients should be treated as “retail clients. We believe that the distinction is useful but question whether mutual fund dealers will have clients that meet the definition of “institutional client”.

Granting IIROC the Power to Make Group Exemptions

A key welcomed proposal is that CIRO’s Board will be able to grant exemption on a group basis as is permitted under the MFDA’s Rules, but not IIROC’s.

We are here to help!

If you would like to discuss the impact of any of the proposals on your business or would like help putting a comment letter together, please call on us. If you would like to comment on the proposals, make sure to have them in by December 19, 2023.